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DEMAND CURVE SLOPE IS DOWNWARD: The demand curve slopes downwards due to the following reasons (1) Substitution

effect: When the price of a commodity(marketable item) falls, it becomes relatively cheaper than other substitute commodities. This induces the consumer to substitute the commodity whose price has fallen for other commodities, which have now become relatively expensive. As a result of this substitution effect, the quantity demanded of the commodity, whose price has fallen, rises. (2) Income effect: When the price of a commodity falls, the consumer can buy more quantity of the commodity with his given income, as a result of a fall in the price of the commodity, consumers real income or purchasing power increases. This increase induces the consumer to buy more of that commodity. This is called income effect. (3) Number of consumers: When price of a commodity is relatively high, only few consumers can afford to buy it, And when its price falls, more numbers of consumers would start buying it because some of those who previously could not afford to buy may now afford to buy it, Thus, when the price of a commodity falls, the number of its consumers increases and this also tends to raise the market demand for the commodity.

The demand curve slopes downwards due to the following reasons (1) Substitution effect: When the price of a commodity falls, it becomes relatively cheaper than other substitute commodities. This induces the consumer to substitute the commodity whose price has fallen for other commodities, which have now become relatively expensive. As a result of this substitution effect, the quantity demanded of the commodity, whose price has fallen, rises. (2) Income effect: When the price of a commodity falls, the consumer can buy more quantity of the commodity with his given income, as a result of a fall in the price of the commodity, consumer's real income or purchasing power increases. This increase induces the consumer to buy more of that commodity. This is called income effect. (3) Number of consumers: When price of a commodity is relatively high, only few consumers can afford to buy it, And when its price falls, more numbers of consumers would start buying it because some of those who previously could not afford to buy may now afford to buy it, Thus, when the price of a commodity falls, the number of its consumers increases and this also tends to raise the market demand for the commodity. (4) Various uses of a commodity (5) law of diminishing marginal utility: The demand curve slopes downward because of:i) Law of diminishing marginal utility : According to this law, as a consumer in a given time, increases the consumption of a thing, the utility from each successive unit goes on diminishing A Consumer gets maximum satisfaction. When the price of a commodity is equal he its marginal utility. As more units are bought, their marginal utility diminishes. Thus, consumers wills buy more units of a commodity, with fall in its price.

ii) Income effect: Change in the price of a commodity causes a change in the real income of the consumer. With fall in price, real income increases. The increased real income is used to buy more units of the commodity.

iii) Substitution effect: When the price of community X falls it becomes cheaper in relation to commodity. Accordingly X is substituted for the commodity. A consumer in order to get more satisfaction, will buy more units of the commodity whose price has fallen in relation to the commodity.

iv) Uses of commodity: If a commodity has diverse uses, with the fall in the price of product consumer will buy more.

Read more: http://wiki.answers.com/Q/Why_does_demand_curve_slope_downward#ixz z27iHRDQ3F

Demand curve is a graphical representation of customers' willingness to purchase a certain commodity at a certain time and price. It is drawn with price on vertical axis and quantity on the horizontal axis. A downward-sloping demand curve demonstrates the changes in demand in relation to changes in prices. This curve shows that the quantity of goods demanded increases when prices decline and

declines when prices increase. Read more: What Is a Demand Curve That Is Downward Sloping? | eHow.com http://www.ehow.com/info_10033608_demand-curve-downwardsloping.html#ixzz27iIGW9r8

Diminishing Marginal Utility

Diminishing marginal utility refers to a trend whereby demand for goods and services is ignited by customers' need to purchase additional units of a product to be able to satisfy their needs. This trend is known as the law of marginal utility, and it means customers can be able to purchase the additional products required to meet their needs only when the prices of the products are reduced. This trend is synonymous with a downward-sloping demand curve.

Income Effect

This is an economic concept that explains the consequences of price reductions to the purchasing abilities of customers. The income effect concept states that consumers' disposable income increases when commodity prices are reduced and this translates to increased purchasing power of consumers. The increased purchasing power as a result of reduced prices, therefore, ignites an increase in demand for goods and services, thereby creating a downward-sloping demand curve.

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Substitution Effect

A downward-sloping demand curve that's attributable to substitution effect arises from selective changes in related commodities that can be substituted for each other. When the price of one of the products is reduced and the rest of the products remain the same, the demand for the commodity with reduced price increases. This is why the trend results in a downward-sloping demand curve.

Keynes's Interest Rate Effect:

Keynes's interest rate effect occurs when the price of commodities directly controls the quantity of goods demanded by consumers. That means that the higher the cost of goods, the more consumers will spend, and when the price is low they spend less. Therefore, consumers will reduce their savings, while banks experience reduced customer deposits. This leads to a decrease in the interest rates offered by banks. Price reductions enable consumers to increase their savings, effectively triggering an increase in demand for commodities or services.

Read more: What Is a Demand Curve That Is Downward Sloping? | eHow.com http://www.ehow.com/info_10033608_demand-curve-downwardsloping.html#ixzz27iHrT8Lz

Why does the demand curve slope down? What causes the demand curve to shift?

What we are interested in understanding is WHY there is an inverse relationship between price and quantity. Why is it that people tend to buy more of something when the price goes down, and less of it when the price goes up. There are 2 relatively simple reasons:

1) Income effect. If the price of a good goes up and your income doesn't, it's much harder to buy the good than it was before. You have to give up more in order to consume as much of it as you did previously. At least some people will decide that they don't want to give up the other things they spend their money on, and instead buy less of the good that had a price increase. Or to put it another way, if stuff gets more expensive, people can't afford it.

2) Substitution effect. If the price of a good goes up, alternative options appear more and more attractive. People switch their spending from the good that rose in price to other, alternative goods. This differs from the income effect because people don't need to be having trouble affording a good in order to switch away from consuming it. When the price of apples went up, I switched to buying pears because pears were cheaper. It wasn't like I was having a hard time affording that extra $0.10 per pound.

These two effects are responsible for the downward sloping nature of the demand curve. Any changes in price can move someone's preferences along that curve.

For example: If apples were $1/lb then I might buy 2 pounds, whereas if they
were $5/lb I might buy only 0.5 pounds. My demand for apples has not decreased,

I have moved up the demand curve. This helps us get at what can be a confusing idea - the difference between demand and quantity demanded. I think it makes the most sense to put it in math terms. Demand is a function; it describes all of the quantities that will be sold at every price. Quantity demanded is one single value that satisfies that function. Demand only changes when the function that describes the relationship between price and quantity changes. It is incorrect to say that just because I purchased a different quantity of something that my demand for it changed. It is only correct to say that my demand for something changed if the quantity purchased changed for a reason OTHER than price.

The quantity of a particular good that people want is sensitive to a number of different variables. The law of demand describes the relationship between quantity and price, but other things effect quantity as well. Because these are variables that aren't shown directly on a graph of demand (since that is just a graph of the relationship between price and quantity), they are expressed graphically by shifting the demand curve either left or right. All of the following scenarios make the demand curve shift right like in the graph below:

1) Change in expectations. Let's say that you think the price of deodorant is going to shoot up tomorrow to $1000 per stick. What would you do today? Well, unless you're very rich or don't mind reeking, you're probably going to buy quite a bit more deodorant today (while it's still cheap) than you would have otherwise. 2) Change in income normal goods. Usually when people get richer they buy more stuff. If people buy more of a particular good as they get richer, we refer to that good as normal. For example, as people get richer, they tend to buy more gold plated toilets and ivory back scratchers. That means those goods are normal and the demand curves for them shift to the right as people get richer. 3) Change in income inferior goods. Sometimes, however, people buy less of something as they get richer. Rich people do not drink very much malt liquor, eat very much mac and cheese from a box, or buy lotto tickets. Poor people buy those things more than rich people do, and we refer to those goods as inferior. The demand curves for these goods shift to the right as people get poorer.

4) Change in the price of related goods substitutes in consumption. Let's say that you want to listen to a classic album by the Pixies. You could satisfy that desire by going to the record store and buying the CD or by downloading the songs from iTunes (because you are an ethical person, you would never, ever, steal from a musician by downloading the songs illegally via some sort of torrent). The physical CD and the downloaded AAC file are substitutes for each other it doesn't really matter that much which one you get. If Apple starts raising the price of iTunes downloads, more and more people are going to decide they'd rather go to the record store, even if the record store keeps their prices the same. A movement up the curve in people's demand for iTunes downloads (NOT a shift) causes a SHIFT in the demand curve for CD's to the right. 5) Change in the price of related goods complements in consumption. Some things just go together: peanut butter and jelly, cake and ice cream, pencils and paper. If you buy one of them, you are much more likely to buy the other one. These goods are complements. If the price of peanut butter drops, that would be a movement along the demand curve for peanut butter (NOT a shift), and people would buy a higher quantity of it. Because they are buying more peanut butter, they are going to buy more jelly also, even if the price of jelly stays the same. The demand curve for jelly SHIFTS to the right.

6) Change in preferences. If people like something more than they used to, they'll buy more of it. This usually happens because of advertising or because people get more information about the good. If the news reported that eating apples prevents cancer, the demand curve for apples would shift to the right, because people are going to prefer it more than they used to.

7) Change in the number of consumers. More people = more buying. That means the demand curve shifts to the right if there are more people.

All of these changes represent a shift to the right. So what causes the demand curve to shift to the left? When exactly the opposite happens.

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